A 3-Stock Mini Portfolio

03/17/2014 9:00 am EST

Focus: STOCKS

Gordon Pape

Editor and Publisher, The Income Investor and the Internet Wealth Builder

We have created a mini US stock portfolio; by investing approximately $5,000 in each of three securities; the risk in this portfolio is somewhat higher than putting the money in a CD but the return potential is far greater, writes Gordon Pape, editor of Internet Wealth Builder.

AT&T (T)

Some investors have complained that this telecommunications giant has not performed very well for us since it was recommended in May 2012 at $33.59.

However, what we're looking for in this portfolio is stability, low downside risk, and good cash flow. AT&T offers all three and is currently at the lower end of its 52-week trading range.

The downside potential is minimal because of the stock's high dividend, which is currently $0.46 per quarter ($1.84 annually) for a yield of 5.5%. So, even if the share price does nothing, the cash flow will be well in excess of anything we can get from a CD. We will buy 150 shares of AT&T at $33.22 for a total outlay of $4,983.

Wells Fargo & Company (WFC)

This is now the most profitable bank in the United States, with earnings in 2013 of $21.9 billion ($3.89 per share). It was originally recommended in January 2013 at $35.14 and now trades at $45.58 for a capital gain of almost 30%.

Given the recent traumatic history of US banks, some investors may be nervous about adding this stock. However, WFC is one of the strongest American banks and did not really need a government bailout at the time of the 2008 credit crisis.

If behind-the-scenes accounts are correct, the bank reluctantly accepted government money so as to maintain a united front with other banks. Wells Fargo took advantage of the chaotic situation to snap up troubled companies, like Wachovia, at bargain prices. It has since repaid the government loan.

The stock currently pays a quarterly dividend of $0.30 a share ($1.20 annually) to yield 2.85%. I expect a dividend increase in the second quarter, which will punch up the yield to the 3% range. We will buy 110 shares of WFC at $45.58 for a cost of $5,013.80.

PIMCO Income Opportunity Fund (PKO)

This is a highly-diversified fixed-income portfolio managed by one of the most respected bond houses in the world.

Manager Dan Ivascyn has built a global portfolio of corporate debt, government and sovereign debt, mortgage-backed and other asset-backed securities, bank loans and related instruments, convertible securities, and other income-producing securities of US and foreign issuers, including emerging market issuers.

We originally recommended this fund in November 2009 at $21.63. It currently trades at $29.16 and pays monthly distributions of $0.19 per unit ($2.28 annually) to yield 7.8%.

As the high yield suggests, this is actually the most risky of the three components of this mini-portfolio, even though it invests in bonds. It fell 24.4% in the crash of 2008, however, it held up very well in 2013, gaining 7.3% when most bond funds were losing ground. We will buy 170 shares at $29.16 for a total cost of $4,957.20.

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